What is Short Duration Mutual Fund & How to Invest: Meaning & Returns

When it comes to investing in bonds, many investors are looking for a balance between stability and yield. Short duration fund, also known as short-term bond funds, offer just that. These funds invest in bonds with shorter maturity dates which can provide a steady stream of income while reducing interest rate risk. In this blog post, we will take a detailed look at short duration funds, what they are, how they work, and why they might be a good investment option for you.

What are Short Duration Funds?

Short duration funds, also known as short term bond funds, are a type of debt mutual fund that invest primarily in debt securities with a maturity of 3-4 years. These funds invest in a mix of government and corporate bonds, treasury bills, and other money market instruments. The objective of these funds is to generate regular income for investors while keeping the risk profile low.

The key feature of short duration funds is their duration, which refers to the average maturity of the underlying securities in the portfolio. A short duration fund has a lower duration compared to a long duration fund, which means that the portfolio is invested in securities that have a shorter maturity period. This makes them less sensitive to interest rate fluctuations, which is why they are considered a relatively safe investment option.

Why Invest in Short Duration Funds?

Short duration funds offer a number of benefits for investors. Some of the key advantages of these funds are:

• Low Risk: As mentioned earlier, short duration funds invest in securities with shorter maturity periods. This makes them less sensitive to interest rate fluctuations, which in turn, makes them a relatively safe investment option.
• Regular Income: Best short duration bond funds generate regular income for investors through interest payments on the underlying securities. This makes them a good option for investors who are looking for a steady stream of income.
• Tax Efficiency: These funds are considered tax-efficient as they are taxed at a lower rate compared to other debt funds. This is because they are classified as debt funds, and the gains from these funds are taxed at 20% with indexation benefit.
• Diversification: Short duration funds provide diversification benefits as they invest in a mix of government and corporate bonds, treasury bills, and other money market instruments. This helps to spread out the risk across different types of securities and sectors.
• Short Term Investment: Short duration debt fund are suitable for short-term investments as the underlying securities have shorter maturity periods. This makes them a good option for investors who are looking for a short-term investment option.

Best Short Duration Bond Funds

When it comes to short duration funds, there are a number of options available for investors to choose from. Some of the best short duration bond funds in India include:

• HDFC Short Term Debt Fund: This fund is one of the most popular short duration funds in India. It has a consistent track record of delivering good returns to investors.
• ICICI Prudential Short Term Plan: This fund is another popular option among short duration funds. It has a diversified portfolio with a mix of government and corporate bonds.
• L&T Short Term Bond Fund: This fund has a consistent track record of delivering good returns to investors. It has a diversified portfolio with a mix of government and corporate bonds.
• Kotak Short Term Bond Fund: This fund has a diversified portfolio with a mix of government and corporate bonds. It has a consistent track record of delivering good returns to investors.
• Franklin India Short Term Income Plan: This fund has a consistent track record of delivering good returns to investors. It has a diversified portfolio with a mix of government and corporate bonds.

Short Duration Debt Funds vs Short Duration Bond Funds

Short duration debt funds and short-duration bond funds may sound similar, but there is a subtle difference between the two. Short duration debt funds invest primarily in debt securities with a maturity of 3-4 years, while short duration bond funds invest primarily in bonds with a maturity of 1-3 years. This means that short duration funds have a shorter duration compared to short duration debt funds. 

Both types of funds have similar objectives and offer similar benefits to investors. However, short duration bond funds may be slightly more risky than short duration debt funds, as they invest in securities with a shorter maturity period. This makes them more sensitive to interest rate fluctuations.

Risks and Considerations of Short Duration Funds

In this section, we'll take a closer look at the risks and considerations associated with short duration debt fund, so you can make an informed decision about whether or not they're right for you.

• Interest Rate Risk

As mentioned earlier, short duration funds invest in debt securities with a maturity of 3-4 years. Interest rate risk is the risk that the value of these securities will decrease due to a rise in interest rates. When interest rates rise, the value of the underlying securities in a short duration fund's portfolio decreases, which can lead to a decline in the fund's NAV.

• Credit Risk

Short duration funds also carry the risk of credit default by the issuer of the underlying securities. A credit default occurs when the issuer of a security is unable to meet its debt obligations. This can lead to a decline in the value of the underlying securities, which can negatively impact the fund's NAV.

• Diversification

Diversification is an important aspect of investing, and short duration funds are no exception. Diversifying your portfolio across different sectors and securities can help to spread out the risk and potentially minimize losses.

• Monitoring the Fund

It is important to keep an eye on the fund's portfolio and performance. By regularly monitoring the fund, you can ensure that it aligns with your investment goals and that it is performing well.

Align with your investment goal:

It's important to ensure that the fund aligns with your investment goals and risk tolerance. Before investing in a short duration fund, take the time to understand your investment goals and risk tolerance, and then choose a fund that aligns with these factors.

In conclusion

Short duration funds are a type of debt mutual fund that invest primarily in debt securities with a maturity of 3-4 years. These funds offer a number of benefits for investors, including low risk, regular income, tax efficiency, diversification, and short-term investment options. Short duration bond funds are similar, but invest primarily in bonds with a maturity of 1-3 years, which may be slightly more risky.

Overall, short duration funds can be a good investment option for those who are looking for a relatively safe investment option with regular income potential. However, as with any investment, it is important to do your own research and consult with a financial advisor before making any decisions.